Trade tensions will not spare even the most mature APAC banks

High foreign currency exposure is a rising threat.

Escalating trade tensions between the US and China are expected to hurt banks across APAC through a reduced demand for export finance and adding on corporate credit risks, according to credit rating agency Fitch.

Although the region’s lenders have generally strong capital positions, the spectre of the trade war would add to the growing market risk banks must face in addition to global push towards tightening that is poised to even hit banks from the most mature markets.

Lenders from the developed economies of Hong Kong and Singapore will be amongst the most vulnerable due to their large foreign currency exposure owing to their status as regional financial centers.

An earlier report by UOB Kay Hian singled out DBS and OCBC as amongst those at greater risk due to their larger footprints in Greater China with Dao Heng Bank for DBS and Wing Hang Bank for OCBC.

Greater China represented a fourth (25%) of DBS profit before tax and total assets compared to 19% for OCBC.

“DBS and OCBC benefit more from growth within Greater China. However, they will be affected more if trade conflicts escalate, resulting in broader slowdown at China’s coastal provinces,” said UOB analyst Jonathan Koh.

Also read: Trade jitters could slow Singapore bank loan growth to 7% by end-2018

Fitch adds that Chinese banks with considerable exposure to sectors targeted by the tit-for-tat tariffs including electronic and automotive components, furniture and consumer electronics run the risk of deteriorating asset quality although not yet at a significant level as Beijing aims to mitigate the impact across the corporate sector.

Even though they have less foreign currency exposure, the banking systems of Indonesia, Malaysia and the Philippines are similarly vulnerable as they have thin capital buffers to shield against any volatile impact.

“Trade finance and export credit growth will be more directly affected by trade tensions, particularly with respect to trade between the US and China. Banks with the largest international focus, including export-import banks, are probably the most exposed - especially if heavily involved with China,” Fitch said in a report.

Photo from Mstyslav Chernov - Self-photographed,CC BY-SA 3.0,